Investors’ Portfolios Often Defy Their Stated Risk Tolerances

A systematic view can help align asset allocations with risk tolerance.

Many consumers’ investment allocations are inconsistent with their tolerance for risk, leaving them overexposed to loss during volatile market swings. Utilizing a color-coded system can visually connect assets to allocations, providing a meaningful, at-a-glance perspective.

Retirees jeopardize their financial foundation when gaps exist between their investment portfolios and tolerance for risk. This misalignment is seen frequently by investment advisers and can leave retirees overexposed to loss during periods of market volatility.

Besides their shared desires for financial security, travel, leisure and good health, many of today’s retirees are discovering part-time work, new careers or hobbies that blossom into businesses. To alleviate threats to these newfound lifestyles, many financial planners advocate a structured retirement plan that includes a color-coded system to easily identify asset allocations and potential risk tolerance gaps. Visual learners can especially benefit from the concept of blue, green and red money.

Blue money has a five-year time horizon, and is intended to cover emergencies or costly solutions, such as a new roof, air conditioner or car repair. These funds – typically placed in in savings or money market – are highly liquid for protection from risk and easily accessible. Growth is not an expectation for blue money.

Green money is also protected, but less liquid to allow for annual growth of perhaps 4% – 8%. It’s often the largest proportion, and is intended to take owners through their lives. Fixed index annuities, which offer growth and payment guarantees through death and account depletion, can be a fit for this category.

Red money is for volatile holdings where long-term growth is desired within an overall tolerance of risk. Since red money is not intended for short-term purposes, it doesn’t factor into the sequence of returns within the retiree’s distribution phase.

individuals in or considering retirement can initiate this or a similar system on their own, or by working with a retirement specialist who prioritizes the client’s wants and needs within the context of full disclosure.

Strong consideration should be given to the retiree’s desired lifestyle, and more importantly, an honest appraisal around the potential loss of money. These gut-check assessments can produce a true tolerance for risk, and can help avoid the all-too-common gaps between actual and desired asset allocations that can threaten a lifetime of savings.

Syndicated financial columnist Steve Savant interviews top retirement specialists in their field of expertise. In this segment we’re talking to certified senior adviser and affiliate solicitor with a registered investment advisory firm John Conyers. Right in the Money is a financial talk show distributed in daily video press releases to over 280 media outlets and social media networks.

Right on the Money is a financial talk show comprised of an exclusive group of insurance and financial professionals from around the country who have a desire to inform consumers on financial-focused topics that could affect the way they plan for retirement.

This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice. Please consult with a professional specializing in these areas regarding the applicability of this information to your situation. The presenters of this information are not associated with, or endorsed by, the Social Security Administration or any other government agency. MP-0364 – 2016/11/28